Monday, February 16, 2015

With negative interest rates sweeping the nation, investors are turning to gold to avoid cash charges

Swiss bank and wealth manager, Vontobel Holding AG, reports that Swiss investors are turning to gold as the Swiss National Bank is forcing banks to add charges to cash deposits. Coupled with concerns over Greece's potential exit from the eurozone and the possibility of increased conflict in Ukraine, this means that an increasing number of investors will be looking for safe haven assets to protect their holdings.

Gold has already climbed 4.2 percent this year in spite of potentially higher interest rates in the U.S. strengthening the dollar, as investors' holdings in gold-backed funds are reaching a peak not seen since October. Chief Executive Officer of Vontobel, Zeno Staub, told reporters that they "keep noticing that gold is coming back into favor with investors" when the company announced their yearly earnings on Wednesday.

The negative yield from holding onto Swiss francs and bonds is making bankers and their clients look for alternate investment options. The increased charges imposed by the Swiss National Bank on banks keeping their franc deposits in the central bank saw Vontobel increase their proportion of gold in discretionary managed investments by two percent.

Several prominent Swiss banks, including UBS Group AG and Credit Suisse Group AG, as well as Geneva's biggest banks are all introducing additional deposit charges to certain types of customers in order to compensate for the introduction of negative interest rates by the Swiss National Bank. In order to avoid the cash charges, many investors are turning towards gold.

While Staub said that Vontobel charging some clients more is only meant to dissuade large investors (like banks) from seeking security and that smaller and private clients won't be affected by the changes, Chief Executive Officer of UBS Group AG, Sergio Ermotti, voiced his concerns that this might not be the case.

Ermotti believes that the franc's surge and negative interest rates in Switzerland and other euro areas might end up putting pressure on profitability should they continue, suggesting that private clients might end up being affected by the cost of negative rates as well.

Sunday, February 1, 2015

A long-time Fed is worried: "We're not going to be able to hold the line anymore."

In a recent interview with the New York Times, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, voiced some serious concerns over the long-term effects and ramifications of the Fed's ongoing loose monetary policies.

Plosser, whose term as a key policy maker in the bank will end in March, has often criticized the Fed's policies during his nine-year term on the board.

Plosser maintains that history has proven that monetary policy is only a temporary way to assist economic growth and that, once we reach a tipping point with the Federal Reserve's loose monetary policies (such as Quantitative Easing and near-zero interest rates), we will experience significant negative backlashes. Most recently, the European Central Bank experienced this first-hand when the Swiss National Bank de-pegged the franc from the euro, thus sending the value of the euro plummeting. According to Plosser,

"At some point the pressure is going to be too great. The market forces are going to overwhelm us. We're not going to be able to hold the line anymore."

Plosser argues that the idea that low inflation somehow indicates a weak economy was rebutted in the 1970s, and therefore calls for raising short-term interest rates ahead of time – regardless of what the move's effects may be on inflation. By taking such an action, one of his primary hopes is to avoid reaching a point in the future when market forces dictate that the Fed must increase interest rates quickly. Such a scenario could be disastrous to the economy and cause significant volatility.

Plosser also stresses that any monetary or fiscal policies, especially as loose as those of the Federal Reserve, cloud our view of normal market conditions. He argues that we must deal with the economy in a realistic fashion rather than through unrealistic or overzealous application of stimuli. If anything, he believes that most of the Fed's loose policies should have ceased as soon as the financial crisis was over.

One major concern is what the consequences of the Federal Reserve's monetary policy will end up being, especially over the next five to ten years. Plosser claims that the real cost of what the Fed is doing has not yet been determined:

"I think the jury is still out on the costs. Because the cost I was worried about was the longer-term cost of unraveling all of this. So maybe I was right, maybe I was wrong. That remains to be seen."

Once the market realizes that the Fed can no longer keep holding interest rates back in order to increase liquidity, a snap-back in premiums will become unavoidable. This threatens to further plunge the economy into uncertainty and volatility as everyone would suddenly finds themselves with less money.